NEW YORK (TheStreet) -- Last week, oil giant BP (BP) - Get Report announced that it will suspend three quarters of dividends, sharply reduce its investment program and sell $10 billion of assets to support a $20 billion fund to pay for damages from the Gulf of Mexico oil spill. The costs of responding to the Gulf of Mexico oil spill have risen to $2 billion, according to the company.
It's been estimated that the dividend payouts would have totaled about $2.6 billion a quarter, similar to recent quarters. Which means that somewhere out there, legions of investors are missing out on a hefty chunk of change. For such investors -- the ones currently seeking alternatives to BP dividends -- James Dailey, senior portfolio manager of Harrisburg, Pa,-based Team Asset Strategy Fund, offers a variety of suggestions.
TheStreet: Now that BP's quarterly dividend has been suspended, what alternatives do investors have?
Dailey: I think a natural migration would be towards the other European majors. We own
, which is not much more expensive than BP -- without any of the current political environment. They have very little or no exposure to the Gulf. When we finished buying it, we had a core position in it; it was around 4%, 4.5% of the fund leading into this mess.
When we finished buying it, it was trading at less than six times earnings, with a dividend yield of 6%.
, which we don't own, is similar. We just prefer Total. It's not that I don't like Royal Dutch, I just like Total better. The
Shell's yield's similarly high in the five-to-six-percent range.
TheStreet: Aside from the oil majors, where else can investors go?
Dailey: I think there's quite a lot of attractive blue chips that aren't necessarily direct corollary, in the energy space. There are some pharmaceuticals that pay generous dividends:
-- it's a high-quality pharmaceutical name, with about 4%, 4.5% yield.
both yield 6.5%.
So there's plenty of places to get yield right now.
TheStreet: Where shouldn't they be looking?
Dailey: Most people are looking in the wrong places. People are buying corporate bonds and going out in duration of the maturity and incurring that interest-rate risk; which
isn't necessarily all that wise over a long-term basis
Treasuries are 3%, ten-year; and 3%
to me, right now, with that type of yield, is almost like buying a TIP -- a treasury inflation-protected bond -- just with more volatility. And that's what most people have an issue with. I think that's a reasonable concern to have, but I think over the next three to five years, those blue chips with significant dividends -- defensible businesses, meaning that their earnings were relatively stable through the worse recessions of the great depression, that grew their dividends consistently -- over the next 3 to 5 years, I think they'll do far better than most other segments. Not only in the stock market, but also in corporate, or any of those other things that people are looking for, for income.
With the government anchoring rates where they have, again -- we've already been through this movie, played out from 2002 to 2007, where they kept rates too low, for too long, and people started reaching for yield; they were buying bank-preferred stocks, and then 2008 showed up, and they got hammered in it all -- so I think it's a valid concern. But I think that going big, stable, with some modest growth prospects going forward, is very reasonable.
TheStreet: Which is a better dividend stock? Exxon or Total?
Dailey: Whenever we approach a broader theme, our process is very top-down, so we're always looking at overarching, long-term themes; one, is that we think that commodities began a long-term bull market in the late-nineties, and it's probably going to last another ten years or more, and that we want to have some involvement in energy because of that.
And right now, the cheapest way to have that exposure isn't even through the commodity, because of the decline in some of these large, integrated oils. We thought we could get better bang for a buck and better risk-reward profile in integrated oils. Any time we get into one of those themes, we tend to do a barbell between quality and value -- so Exxon Mobil is the premier, high-quality, best-managed, integrated oil company in the world, in our opinion. They have the best balance sheet, they have the best return on capital, all that.
Total, not so much. But it's trading at such a depressed valuation relative to its peers -- we think it's the cheapest -- and BP now takes on that role, but they have some issues that we're not so sure about. So we'd rather buy something that's a little more expensive in Total, that doesn't have the risk that we can't really gauge ... there are so many things that are going to play in this BP situation that we can't really model or have any edge on. So Total's really the other part of the barbell; not quite as high quality; we call it low-quality; it's not premium quality; and the value is just compelling.
So, on a day-to-day basis, you'll see the relative volatility: Exxon might be up 1%, Total will be up 2%, and then vice versa -- Exxon's a little bit more conservative, and Total's a little bit more progressive. From a dividend perspective, blending both would be a nice option, where I think that over time, Exxon's dividend would be much more likely to grow faster than Total's. So if you think about it in a total return, long-term perspective, I would have more confidence that Exxon's dividend is not only sustainable, but will likely grow, maybe even at a double-digit rate, as they have historically.
So going back to that issue -- it's almost like a treasury inflation-protected bond, only for better inflation protection. And then Total -- the dividends are more attractive now, but probably won't grow as fast because they're not as much of a growing company and they're just not as well run; the balance sheet is a little less flexible.
So, it doesn't have to be binary. Mixing them together is certainly prudent.
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-- Reported by Andrea Tse in New York
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